Understanding and Preventing Affiliate Fraud

Affiliate marketing is on the rise as merchants seek new methods and better tools to improve their marketing reach and increase sales. Used properly, affiliate marketing is an extremely useful tool that can produce increased revenue for a business; however, it is also rife with fraud. G2 Web Services estimates that 2 percent of all affiliate-driven transactions are fraudulent. These fraudulent transactions leave acquirers, ISOs, PSPs and merchants with real financial loss as well as a significant increase in chargeback levels.

Fraudulent Affiliate Transactions

Affiliate marketing is a model that involves merchants paying affiliates to drive consumer traffic to a merchant’s website. The merchant pays the affiliate a commission for transactions that originate from affiliate activities and efforts. Fraudsters will go to great lengths to take advantage of the affiliate marketing model, especially since affiliate fraud can be very profitable. Often the merchant only pays the commission when a consumer purchases from the merchant, so the incentive lies on the affiliate to find new customers who will buy the merchant’s products. That is where the opportunity for fraud arises. The affiliate manufactures new consumer aliases based on compromised cards. The merchant is unable to detect these aliases brought forward by the fraudulent affiliate so they pay out the commissions, only to be left days later with bogus transactions and high chargeback levels.

Below is an example of just how lucrative this scheme is:

Affiliate marketing commission example

It’s no wonder affiliate fraud has become such an issue in the payments industry. Unfortunately, the effects are felt by all parties involved in the transactions and amount to significant loss at the hands of criminals. Fraudulent affiliate transactions are a headache to deal with, not only for the merchant, but also for the acquirer.

For acquiring banks with direct merchant relationships or payment providers supporting merchants, knowing what to look for is the first step to identify and prevent affiliate fraud. Who are these affiliates, where are they generating their leads and how are they driving consumers to a merchant’s website? In some cases, G2 has seen instances where affiliates establish brand-damaging websites to harvest card data from unsuspecting individuals, only to use that card data for affiliate-related commissions. In those cases, affiliate fraud has been exploited on sites originated from brand-damaging content, which results in additional penalties and losses for the acquirer or PSP.

How to Prevent Affiliate Fraud?

The first line of defense for a payment provider to prevent affiliate fraud is to ensure that merchants are closely monitoring their affiliate sites and their affiliates’ networks. Encourage merchants to take the time to properly vet and research potential affiliates. Confirm that they are a reputable business with an equally reputable online presence. Ultimately, many of the negative effects of affiliate fraud will fall back on the payment provider, which means payment providers should also take the necessary precautions to protect against affiliate fraud.

The best way to identify affiliate fraud is to look at each payment at the transaction level to determine where the transaction originated. Of course, depending on the merchant’s transaction volume, this can be a time-consuming and tedious process. G2 Web Services recommends looking into affiliate protection technology, which can help you gain transparency into each transaction, allowing you to isolate and put a stop to affiliate fraud at the source. Understanding where the transaction started and how it arrived at the merchant’s website are key steps in determining the likelihood of a transaction being associated with affiliate fraud.

Overall, affiliate marketing can be very effective at driving traffic and transactions, but it is important to take steps to prevent affiliate fraud by educating your merchants and engaging an affiliate fraud prevention technology provider to help you distinguish the good affiliates from the bad.